What is a Loan? | Definition And Types
4 min read
Explore what a loan is. Learn about the types of loans with examples. Understand the entire process of a loan and some of the common advantages and disadvantages.
What are the five types of loans?
There are many types of loans. Some of the most popular ones are car loans, student loans, home loans (mortgage), business loans, and credit cards.
What is a loan and its types?
A loan is money borrowed from a bank or other financial institution. The borrower agrees to repay the principal amount, plus interest. Loans may be secured or unsecured, and they may be open-ended or closed-ended.
What is an example of a loan?
One example of a loan is a car loan. This is a closed-end loan, meaning there is a fixed principal amount, term, and regular monthly payments.
શાળા માં મોડું થાય તો
What is a Loan?
A loan is money borrowed from a bank or financial institution. The borrower agrees to pay back the principal amount of the loan plus interest. There are several types of loans, including car loans, student loans, and home mortgages.
Attributes of Loans
Although there are several different types of loans which will be discussed below. All loans have several common attributes:Principal: The original amount of the loan or the money borrowed.
Interest: A percentage of the principal the lender charges the borrower. This money must be paid along with the original amount borrowed.
Term: The length of time it will take for a borrower to repay the original principal and interest completely. A loan that is expected to be repaid within a year or less is considered short-term, while anything longer than a year is considered a long-term loan.
Payment Amount: The dollar amount the borrower agrees to repay each month. This payment includes both the principal and interest. If a borrower chooses to pay over the payment amount in a given month, the extra money will directly pay down the interest.
The Loan Process
If someone wants to apply for a loan, there are several important steps to follow. These may vary slightly depending on the type of loan, but in general, those steps are:
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Types of Loans
There are many types of loans, such as personal loans, car loans, and student loans. Even credit cards are considered a type of loan. Generally, they are classified into a few categories.
Secured Loans and Unsecured Loans
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Simple and Compound Interest
Advantages of a Loan
Disadvantages of a Loan
Lesson Summary
Video Transcript
What is a Loan?
Loans can be a great thing, but they can also get you into trouble. One of the keys to being financially successful is understanding when loans are a good solution for your situation. Loans are never a good idea if you can't afford to pay them back in the required time frame. Let's explore what a loan is and find out some of the common ways to borrow money.
A loan is when you receive money from a friend, bank or financial institution in exchange for future repayment of the principal, plus interest. The principal is the amount you borrowed, and the interest is the amount charged for receiving the loan. Since lenders are taking a risk that you may not repay the loan, they have to offset that risk by charging a fee - known as interest. Loans typically are secured or unsecured. A secured loan involves pledging an asset (such as a car, boat or house) as collateral for the loan. If the borrower defaults, or doesn't pay back the loan, the lender takes possession of the asset. An unsecured loan option is preferred, but not as common. If the borrower doesn't pay back the unsecured loan, the lender doesn't have the right to take anything in return.
What are the five types of loans?
There are many types of loans. Some of the most popular ones are car loans, student loans, home loans (mortgage), business loans, and credit cards.
What is a loan and its types?
A loan is money borrowed from a bank or other financial institution. The borrower agrees to repay the principal amount, plus interest. Loans may be secured or unsecured, and they may be open-ended or closed-ended.
What is an example of a loan?
One example of a loan is a car loan. This is a closed-end loan, meaning there is a fixed principal amount, term, and regular monthly payments.
શાળા માં મોડું થાય તો
What is a Loan?
A loan is money borrowed from a bank or financial institution. The borrower agrees to pay back the principal amount of the loan plus interest. There are several types of loans, including car loans, student loans, and home mortgages.
Attributes of Loans
Although there are several different types of loans which will be discussed below. All loans have several common attributes:Principal: The original amount of the loan or the money borrowed.
Interest: A percentage of the principal the lender charges the borrower. This money must be paid along with the original amount borrowed.
Term: The length of time it will take for a borrower to repay the original principal and interest completely. A loan that is expected to be repaid within a year or less is considered short-term, while anything longer than a year is considered a long-term loan.
Payment Amount: The dollar amount the borrower agrees to repay each month. This payment includes both the principal and interest. If a borrower chooses to pay over the payment amount in a given month, the extra money will directly pay down the interest.
The Loan Process
If someone wants to apply for a loan, there are several important steps to follow. These may vary slightly depending on the type of loan, but in general, those steps are:
To unlock this lesson you must be a Study.com Member.
Types of Loans
There are many types of loans, such as personal loans, car loans, and student loans. Even credit cards are considered a type of loan. Generally, they are classified into a few categories.
Secured Loans and Unsecured Loans
- In a secured loan, the borrower must offer some collateral, an asset that the lender may seize if the borrower fails to make a payment. A home deed is a common form of collateral. Secured loans are usually for a large amount of money. Car loans and home mortgages are common examples of secured loans.
- Secured loans have strict borrowing limits, extended repayment plans, and usually, low-interest rates compared to other loan types. For example, if a borrower is seeking to buy a house, the amount borrowed would be the exact dollar price of the house, plus any additional fees, and the term could be as long as thirty years.
- An unsecured loan does not require collateral. These a generally shorter-term loans for smaller amounts. Credit cards, student loans, and personal loans are common examples. Since there is no collateral, lenders will often be very thorough in assessing borrowers' financial status.
To unlock this lesson you must be a Study.com Member.
Simple and Compound Interest
Advantages of a Loan
Disadvantages of a Loan
Lesson Summary
Video Transcript
What is a Loan?
Loans can be a great thing, but they can also get you into trouble. One of the keys to being financially successful is understanding when loans are a good solution for your situation. Loans are never a good idea if you can't afford to pay them back in the required time frame. Let's explore what a loan is and find out some of the common ways to borrow money.
A loan is when you receive money from a friend, bank or financial institution in exchange for future repayment of the principal, plus interest. The principal is the amount you borrowed, and the interest is the amount charged for receiving the loan. Since lenders are taking a risk that you may not repay the loan, they have to offset that risk by charging a fee - known as interest. Loans typically are secured or unsecured. A secured loan involves pledging an asset (such as a car, boat or house) as collateral for the loan. If the borrower defaults, or doesn't pay back the loan, the lender takes possession of the asset. An unsecured loan option is preferred, but not as common. If the borrower doesn't pay back the unsecured loan, the lender doesn't have the right to take anything in return.
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